We are the largest futures exchange in the United States for the trading of futures
contracts and options on futures contracts, often called derivatives.Our customers,
which include our members, traded futures contracts and options on futures contracts,
making us the world's largest exchange by this measure. We also have the largest
futures and options on futures open interest of any exchange in the world. Liquidity
of markets, or the ability of a market to quickly and efficiently absorb the execution
of large purchases or sales, is a key to attracting customers and contributing
to a market's success.
Futures and options on futures provide a way to protect against ' and potentially
profit from ' price changes in financial instruments and physical commodities.
Futures contracts are legally binding agreements to buy or sell something in
the future, such as livestock or foreign currency. The buyer and seller of a
futures contract agree on a price today for a product to be delivered and paid
for in the future. Each contract specifies the quantity of the item and the
time of delivery or payment.
Our products provide a means for hedging, speculation and asset allocation
relating to the risks associated with interest rate sensitive instruments, equity
ownership, changes in the value of foreign currency and changes in the prices
of commodity products. Our customer base includes professional traders, financial
institutions, institutional and individual investors, major corporations, manufacturers,
producers, supranational entities and governments.
As a marketplace for global risk management, our exchange brings together buyers
and sellers of derivatives products, which trade on our CME' Globex' electronic
trading platform, on our trading floors through open outcry and via privately
negotiated transactions that we clear. We offer market participants the opportunity
to trade futures contracts and options on futures contracts on interest rates,
equity indexes, foreign exchange and commodities. Our key products include CME
Eurodollar contracts and contracts based on major U.S. stock indexes, including
the S&P 500' and the NASDAQ-100'. We also offer contracts for the principal
foreign currencies and for a number of commodity products, including cattle,
hogs and dairy. We believe several of our key products serve as global financial
benchmarks. For example, our CME Eurodollar contract provides a benchmark for
measuring the relative value of U.S. dollar-denominated, short-term fixed-income
securities. Similarly, our S&P 500 Index and NASDAQ-100 Index contracts
are closely linked to the benchmark indexes for U.S. equity performance.
We own our clearing house, which is the largest derivatives clearing operation
in the world for futures and options on futures, and we guarantee, clear and
settle every contract traded through our exchange. As a result of our agreement
to provide clearing and related services to the Chicago Board of Trade, or the
CBOT, we now clear approximately 90% of all futures contracts and options on
futures contracts in the United States. During 2004, we processed an average
of approximately 701,000 and 365,000 trade transactions per day for CME, including
our non-traditional TRAKRS contracts, and CBOT products, respectively. We currently
have the capacity to clear more than 4.0 million trade transactions per day.
Our systems are scalable and give us the ability to increase our capacity with
little lead time. As of December 31, 2004, we acted as custodian for approximately
$44.1 billion in performance bond collateral, including $3.1 billion in deposits
for non-CME products. In 2004, we moved an average of $1.5 billion of settlement
funds through our clearing system each day. In addition, 50 exchanges and clearing
organizations worldwide have adopted our CME SPAN' risk evaluation system, which
is used to determine the appropriate performance bond requirements for trading
portfolios.
CME was founded in 1898 as a not-for-profit corporation. In November 2000,
we became the first U.S. financial exchange to demutualize and become a shareholder-owned
corporation. As a consequence, we have adopted a for-profit approach to our
business, including strategic initiatives aimed at optimizing volume, efficiency
and liquidity. We posted record trading volume of approximately 787 million
contracts in 2004, an increase of approximately 27% over 2003, which was previously
our busiest year.
We have a history of innovation in our industry. In the 1960s, we introduced
the first livestock futures contract that resulted in the physical delivery
of live cattle. In 1972, we introduced the world's first financial futures contracts
when we launched seven foreign exchange futures contracts. That innovation fundamentally
changed the nature and scope of futures markets, transforming them from agricultural
hedging mechanisms to hedging and risk management markets for financial instruments
and financial risks. We also developed the first cash-settled futures in 1981
with the introduction of CME Eurodollar futures, which is one of the world's
most actively traded futures contracts. Cash settlement also enabled us to introduce
in 1982 the first successful stock index futures contract, the S&P 500 futures.
In 1987, we pioneered the concept of global electronic trading of derivatives
contracts, and we subsequently launched the CME Globex electronic trading platform
in 1992. Today, most of our products trade electronically, as well as on our
open outcry trading floors. In 1997, we introduced the first of the CME E-mini'
stock index products, which are smaller-sized electronically traded versions
of our benchmark stock index futures contracts. In April 2003, we entered into
an agreement with the CBOT to provide clearing and related services for CBOT
futures contracts and options on futures contracts.
We devote substantial resources to introducing new products based on new markets
or securities and increasing the distribution of our existing products. In 2004,
we launched Japanese yen denominated Nikkei 225' stock index futures contracts;
futures and options on futures contracts based on three of the most commonly
used varieties of fertilizer; weather futures and options on futures for Tokyo
and Osaka, Japan; electronically traded futures contracts on the U.S. Consumer
Price Index, or CPI, and equity index options on E-mini NASDAQ-100 futures contracts.
Options on E-mini Russell 2000' futures contracts, the fourth most active stock
index contract in the United States, were launched in the first quarter of 2005.
In addition, in 2004 we announced our agreement with Reuters Transaction Services
Limited, or Reuters, to offer access to our electronic foreign exchange markets
to Reuters' global customer base over the Reuters Dealing 3000 trading system.
This arrangement will give dealers in the interbank market direct access to
our foreign exchange products in cash equivalent format and will enhance their
ability to seamlessly trade foreign exchange spot, forwards and futures. To
further expand access and increase efficiency of our CME Globex platform throughout
Europe, we added six telecommunications hubs, in addition to the one we had
in London, in the key European financial centers of Amsterdam, Dublin, Frankfurt,
Gibraltar, Milan and Paris. To reduce connectivity costs for our Pacific Rim
customers, we also plan to establish our first Asian hub in Singapore in 2005.
Trading on our open outcry trading floors is conducted exclusively by our members.
Our members are individual traders, as well as most of the world's largest banks,
brokerages and investment houses. Prior to the introduction of our electronic
trading platform, our members traded only on our open outcry trading floors
and through privately negotiated transactions. Today, our members are able to
conduct trading on our open outcry trading floors, electronically on the CME
Globex platform and through privately negotiated transactions that we clear.
Members who broker trades executed on our open outcry trading floors generally
do not play a role in facilitating the execution of transactions on behalf of
customers on the CME Globex platform. In 2004, volume on the CME Globex electronic
trading platform represented approximately 57% of our trading volume compared
to approximately 42% in 2003.
Prior to our demutualization, direct access to our markets, whether on our
open outcry trading floors or through the CME Globex platform, was limited to
members and those with an exchange permit who met specified qualifications.
In connection with our demutualization, we opened access to our markets by allowing
unlimited, direct access to the CME Globex platform for all market participants.
Today, any individual or institutional customer guaranteed by a clearing firm
is able to obtain direct access to the CME Globex platform. As a result of the
increased access to our markets, all market participants now have the ability
to view bids and offers in the market. Generally, member customers are charged
lower fees than our non-member customers. Certain of our customers benefit from
volume discounts and limits on fees as part of our effort to encourage increased
liquidity in our markets. In 2004, our members were responsible for nearly 78%
of our total trading volume.
As a result of our conversion into a for-profit corporation in the fall of
2000, individuals and entities who, at the time, were members and owned trading
rights on our exchange, became the owners of all our outstanding equity. These
individuals and entities continued to own substantially all of our outstanding
equity following our reorganization into a holding company structure in December
2001 and our initial public offering in December 2002. We believe that owners
of trading rights on our exchange continue to own a substantial amount of our
Class A common stock.
Competitive Strengths
We have established ourselves as a premier global marketplace for financial
risk management. We believe our principal competitive strengths are:
' highly liquid markets;
' global benchmark products;
' diverse portfolio of products and services;
' wholly owned clearing house;
' proven and scalable technology; and
' global reach.
Highly Liquid Markets. The liquidity in our markets is a key factor in attracting
and retaining customers. We have the largest open interest of any exchange in
the world of futures and options on futures contracts. As of December 31, 2004,
our open interest record was 28.5 million contracts set on December 9, 2004.
During 2004, we posted record trading volume of approximately 787 million contracts,
an increase of approximately 27% over 2003, making us the most active exchange
in the United States and the second most active in the world for the trading
of futures contracts and options on futures contracts during that period. By
notional or underlying value, we are the largest futures exchange in the world,
with $463 trillion traded in 2004.
Global Benchmark Products. We believe our key products serve as global benchmarks
for valuing and managing risk. Our CME Eurodollar contract serves as a global
benchmark for measuring the relative value of U.S. dollar-denominated short-term
fixed-income securities. Similarly, the S&P 500, NASDAQ-100 and Russell
indexes are considered primary tools for benchmarking investment performance
against U.S. equity market exposure. Our S&P 500, NASDAQ-100 and Russell
Index contracts, which are based on these benchmarks, are recognized by our
customers as efficient tools for managing and hedging their equity market risks.
Diverse Portfolio of Products and Services. We differentiate ourselves from
our competitors by developing and offering to our customers a diverse array
of products, as well as a broad range of trade execution and clearing services.
We have a long history of developing innovative interest rate, equity index,
foreign exchange and commodity products designed to appeal to institutional
and individual customers. We offer both open outcry auction trading and electronic
order-matching services, and we provide facilities to clear privately negotiated
transactions. Our markets provide important risk management tools to our customers,
which include leading global and financial institutions. We work closely with
our customers to create markets and products that meet their needs. These relationships
help us to anticipate and lead industry changes.
Wholly Owned Clearing House. We own our clearing house, which guarantees, clears
and settles every contract traded through our exchange and futures and options
on futures contracts traded through the CBOT. During 2004, we processed an average
of approximately 701,000 and 365,000 trade transactions per day for CME, including
our non-traditional TRAKRS contracts, and CBOT products, respectively. We currently
have the capacity to clear more than 4.0 million trade transactions per day,
and our scalable systems give us the ability to further increase our capacity
with little lead time. On September 24, 2004, the clearing house surpassed one
billion contracts cleared in 2004. In January 2004, we fully implemented our
agreement with the CBOT to provide clearing and related services for CBOT futures
contracts and options on futures contracts. As of December 31, 2004, we acted
as custodian for approximately $44.1 billion in performance bond collateral,
including 3.1 billion in deposits for non-CME products, and, in 2004, moved
an average of $1.5 billion of settlement funds through our clearing system each
day. We believe our performance guarantee is a major attraction to our markets,
particularly compared to the over-the-counter, or OTC, markets, because it substantially
reduces counterparty risk. Our clearing system permits more efficient use of
capital for our customers by allowing netting of long and short positions in
a single type of contract and providing risk offset and cross-margining arrangements
with several other leading clearing houses. In addition, ownership of our clearing
house enables us to more quickly and efficiently bring new products to market
through coordination of our clearing functions with our product development,
technology, market regulation and other risk management activities. Our goal
is to design our system to service historical peak volumes, provide clearing
services to the CBOT and other exchanges and introduce new products with high
volume potential.
Proven and Scalable Technology. We believe our ability to use technology effectively
has been a key factor in the successful development of our business. As a result
of significant investments in our technology asset base, we possess fast, reliable
and fully integrated trading and clearing systems. Our goal is to design our
highly scalable systems to accommodate additional products with relatively limited
modifications and low incremental costs. The core components of our system infrastructure
for trading, clearing and risk management are becoming widely adopted throughout
the futures industry, resulting in common interfaces and efficiencies for intermediaries
and customers. For example, our CME SPAN risk evaluation system has been adopted
by 50 exchanges and clearing organizations worldwide.
Global Reach. Globalization of financial markets is expanding the customer
base for futures products beyond traditional boundaries. Our electronic trading
services, which are available nearly 24 hours a day and five days per week,
position us to take advantage of this development. We have established strategic
relationships with other exchanges and clearing houses around the world to enable
our customers to gain further capital and execution efficiencies. These relationships
are intended to extend the market reach of our global derivatives business.
In addition, we expanded our telecommunications capacity in Europe to include
six new telecommunications hubs, similar to our hub in London that was established
in 2002. These hubs reduce connectivity costs and house direct electronic connections
between the foreign customer and CME Globex, our electronic trading platform.
In 2005, we plan to establish our first Asian telecommunications hub in Singapore.
We also introduced new incentive programs for certain types of customers in
Europe and Asia that have fueled our global expansion by attracting new customers
to our products and markets worldwide.
Growth Strategy
Globalization, deregulation and advances in technology offer significant opportunities
for expanding futures markets, and exchange markets generally. We intend to
increase our trading volumes, revenues and profitability by capitalizing on
these opportunities through implementation of the following four strategies:
' expand our current core business;
' add new products;
' provide transaction processing services and other business services to third
parties; and
' pursue select alliances and acquisitions.
Expand Our Current Core Business. We intend to advance our position as a leader
in the futures industry by expanding customer access to our markets and services,
offering additional trade execution choices and enhancing our market data and
information products.
' Expand Customer Access. We continue to expand our customer base and increase
our trading volume by broadening the access, order routing, trading and clearing
solutions we offer to existing and prospective customers. We were the first
U.S. exchange to allow all customers to view the book of prices, where they
can minimally see at least the five best bids and offers in the central limit
order book and directly execute transactions in our electronically traded products.
This expanded access further increases the transparency of our markets by giving
our customers valuable trading information. We provide our customers with flexibility
to access our markets in the most cost-effective manner for them. For example,
in 2004 we added six telecommunications hubs, in addition to our previously
established London hub, in the key European financial centers of Amsterdam,
Dublin, Frankfurt, Gibraltar, Milan and Paris. In 2005, we plan to add our first
Asian hub in Singapore. We also provide front-end trading terminal software
solutions for a fee, including a cost-efficient Web-based virtual private network
solution for our lower volume customers, which we call CME Globex Trader-Internetsm.
In addition to our standard marketing activities, we are seeking to increase
the number of independent software vendors that offer interfaces to our systems.
Increasing the number of these vendor relationships will enable us to access
a broader network of customers. We also plan to expand our reach by attracting
new distribution channel partners with the capacity to reach large numbers of
nontraditional futures customers. For example, in late 2003 we increased access
to our products through an agreement with Bloomberg, which allows all of its
screens worldwide to access CME products on the CME Globex platform. This past
year we entered into an agreement with Reuters to offer our electronic foreign
exchange markets to Reuters' global customer base in cash equivalent format
and to provide Reuters Dealing 3000 interbank dealer customers with direct access
to our foreign exchange products. This initiative, scheduled to launch in the
first quarter of 2005, will open our markets to a new group of potential users.
' Expand Electronic and Other Trading Venues. Our strategy is to offer our customers
a broad range of trade execution choices, including increased electronic functionality,
enhanced facilities for privately negotiated transactions and an open outcry
environment. We believe offering multiple execution alternatives will enable
us to attract new customers and increase our overall volume. We offer daytime
electronic trading in most of our major product lines. In 2004, we added additional
functionality to increase electronic trading in our products. For example, in
August 2004 we launched our enhanced options system for electronic trading of
options on CME Eurodollars for a limited group of market participants. This
system is designed to facilitate trading of complex combination and spread trades
typically used with short-term interest rate options on futures, within a fully
transparent and competitive execution environment. To make the enhanced functionality
available to the entire marketplace, we plan to link the system with our CME
Globex platform in the second half of 2005. In addition, in October 2004 we
introduced new implied spread trading functionality for CME Eurodollars on the
CME Globex platform. This functionality added the capability to more efficiently
establish and liquidate certain spread positions within the first three years
of the ten-year yield curve. Nearly 452 million contracts were traded electronically
on our CME Globex platform in 2004, an increase of approximately 72% over the
total electronic trading volume in 2003 of approximately 263 million contracts.
' Enhance Our Market Data and Information Products. Our markets generate valuable
information regarding prices and trading activity in our products. We intend
to leverage the value of our market data and information capabilities by developing
enhancements to our existing information products and creating new products.
Revenues from the sale of our market data were $60.9 million and $53.2 million
during 2004 and 2003, respectively. We sell our market data, which includes
information about bids, offers and trade size, to resellers of our market data,
as well as banks, broker-dealers, pension funds, investment companies, mutual
funds, insurance companies, other financial services companies and individual
investors. We believe we can enhance our market data and information product
offerings by packaging the basic data we have traditionally offered with advanced,
analytical data and information to create information products with value-added
services.
Add New Products. We develop new products and product line extensions based
on research and development in collaboration with our customers and financial
services firms. We have created modified versions of some of our existing products
in order to attract new types of customers. For example, we have introduced
the following E-mini versions of our larger open outcry-traded futures contracts:
E-mini S&P 500; E-mini NASDAQ-100; E-mini Russell 1000'; E-mini Russell
2000; E-mini S&P MidCap 400' and E-mini NASDAQ Composite'. By creating smaller-sized
products and offering electronic trading services for them, we have successfully
expanded our customer base and overall volume. We also seek to introduce new
contracts that complement our existing product line. We offer futures contracts
based on the Russell 1000 and Russell 2000 Indexes. These contracts offer exposure
to the Russell 3000' universe of stocks, representing 98% of the investable
U.S. equity market, based on total market capitalization.
In 2004, we launched futures contracts on the Japanese yen denominated Nikkei
225 stock index; futures and options on futures based on three of the most commonly
used varieties of fertilizer; weather futures and options on futures for Tokyo
and Osaka, Japan; electronically traded futures contracts on the CPI and equity
options on our E-mini NASDAQ-100 futures contracts. Options on our E-mini Russell
2000 futures contracts were launched in the first quarter of 2005. In addition,
in 2005 we will launch new euro FX and Japanese yen options on futures contracts
with European-style expiration on the CME Globex platform.
Provide Transaction Processing Services and Other Business Services to Third
Parties. We intend to leverage our existing capacity, scalable technology and
business processes to provide a broad range of services to other exchanges,
clearing organizations and OTC markets. We intend to offer services, including
clearing and settlement processing and risk management, market structuring,
product structuring and trade execution platforms. We believe we can differentiate
ourselves from our competitors by offering some or all of these services on
a cost-effective basis in combination with the potential to access our broad
distribution, customer base and experienced liquidity providers. Users of our
clearing services also have the potential to gain substantial capital and collateral
efficiencies for their clearing firms. In January 2004, we fully implemented
our agreement with the CBOT to provide clearing and related services for CBOT
futures and options on futures contracts. The arrangement provides clearing
firms and customers with the potential to gain operational, performance bond
and capital efficiencies, as well as a combined risk capital pool and other
expected cost savings. As a result of our agreement with the CBOT, our clearing
house is the largest derivatives clearing operation for futures and options
on futures in the world and we now clear approximately 90% of all futures contracts
and options on futures contracts traded in the United States. In 2004, we cleared
600 million contracts for the CBOT. Open interest for CBOT contracts was 9.9
million contracts as of December 31, 2004.
Pursue Select Alliances and Acquisitions. We plan to supplement our internal
growth through the formation of joint ventures or alliances and select acquisitions
of businesses or technologies. We will seek alliances and acquisitions that
help us to enter new markets, provide services that we currently do not offer,
open access to our markets or advance our technology. For example, we acquired
the technology-related assets and intellectual property of Liquidity Direct
in January 2004 to acquire new options and spread trading technology to enhance
the growth of CME Eurodollar options and ultimately other options markets on
the CME Globex platform. In May 2004, we entered into an agreement with Reuters
to offer our electronic foreign exchange markets to Reuters' global customer
base in cash equivalent format and to provide Reuters Dealing 3000 interbank
dealer customers with direct access to our foreign exchange products. This initiative,
scheduled to launch in the first quarter of 2005, will open our markets to a
new group of potential users.
Competition
Prior to the passage of the Commodity Futures Modernization Act of 2000, or
CFMA, futures trading was generally required to take place on or subject to
the rules of a federally designated contract market. The costs and difficulty
of obtaining contract market designation, complying with applicable regulatory
requirements, establishing efficient execution facilities and liquidity pools
and attracting customers created significant barriers to entry for competing
exchanges. The CFMA eroded the historical dominance by the exchanges of futures
trading in the United States by, among other things, eliminating uncertainty
with respect to the enforceability of private transactions in most futures contracts
and similar products, authorizing the use of electronic trading systems to conduct
both private and public futures transactions and lowering or eliminating entry
barriers for new exchanges. For a more detailed description of the regulation
of our industry and the regulatory changes brought on by the CFMA, see the section
of this Annual Report on Form 10-K entitled 'Item 1. Business'Regulatory Matters.'
The CFMA and other changing market dynamics have led to increasing competition
in all aspects of our business from a number of different domestic and international
sources of varied size, business objectives and resources. We now face competition
from other futures, securities and securities option exchanges; OTC markets
and clearing organizations; consortia formed by our members and large market
participants; alternative trade execution facilities; technology firms, including
market data distributors and electronic trading system developers; and other
competitors.
At year-end 2004, there were 56 futures exchanges located in 29 countries,
including 9 futures exchanges in the United States. In February 2004, Eurex
commenced operation of its U.S. derivatives exchange, U.S. Futures Exchange,
L.L.C., or Eurex U.S. Eurex U.S.'s initial competitive efforts were directed
at the CBOT. However, Eurex U.S. has expanded its product offerings to include
futures based on the Russell 1000 and Russell 2000 Indexes in direct competition
with us. In addition, in March 2004, Euronext.liffe began listing and trading
Eurodollar futures contracts. Additionally, because equity futures contracts
are alternatives to underlying stocks and a variety of equity option and other
contracts provide an alternative means of obtaining exposure to the equity markets,
we also compete with securities and options exchanges, including the New York
Stock Exchange and the Chicago Board Options Exchange, or CBOE, dealer markets
such as NASDAQ and alternative trading systems.
OTC markets for foreign exchange and fixed-income derivatives products also
compete with us. The largest foreign exchange markets are operated primarily
as electronic trading systems. Two of the largest of these, operated by Electronic
Brokering Services and Reuters plc, serve primarily professional foreign exchange
trading firms. Additional electronic platforms designed to serve corporate foreign
exchange users are beginning to emerge. Two of these are operated by consortia
of interdealer and interbank market participants. A third is a proprietary trading
system. In addition, certain provisions of the CFMA have led to an increase
in unregulated electronic and brokerage trading systems in the foreign exchange
market. A recent decision of the United States Court of Appeals may also make
it easier for unregistered organizations to conduct futures-like transactions
with retail customers. These systems present significant potential competitive
challenges to the growth of our foreign exchange futures markets.
The OTC fixed-income derivatives market is by far the largest fixed-income
derivatives marketplace. The OTC market consists primarily of interbank and
interdealer market participants. There is currently no single liquidity pool
in the OTC fixed-income derivatives market that is comparable to our Eurodollar
markets. The OTC market for fixed-income derivatives products has traditionally
been limited to more customized products, and the large credit exposures created
in this market and the absence of clearing facilities have limited participation
to the most creditworthy institutional participants. However, the size of this
market and technology-driven developments in electronic trading and clearing
facilities, as well as regulatory changes implemented by the CFMA, increase
the likelihood that one or more substantial liquidity pools will emerge in the
future in the OTC fixed-income derivatives market.
Alternative trade execution facilities that currently specialize in the trading
of equity securities have electronic trade execution and routing systems that
also can be used to trade products that compete with our products.
Technology companies, market data and information vendors and front-end software
vendors also represent potential competitors because, as purveyors of market
data, these firms typically have substantial distribution capabilities. As technology
firms, they also have access to trading engines that can be connected to their
data and information networks. Additionally, technology and software firms that
develop trading systems, hardware and networks that are otherwise outside of
the financial services industry may be attracted to enter our markets.
We also face a threat of trading volume loss if a significant number of our
traditional participants decide to trade futures or similar products among themselves
without using any exchange or specific trading system. The CFMA allows nearly
all of our largest customers to transact futures or similar products directly
with each other. While those transactions raise liquidity and credit concerns,
they may be attractive based on execution costs, flexibility of terms, negotiability
of margin or collateral deposits, or other considerations. Additionally, changes
under the CFMA permitting the establishment of stand-alone clearing facilities
for futures and OTC derivatives transactions will facilitate the mitigation
of credit-risk concentrations arising from such transactions.
We believe competition among exchanges in the derivatives and securities businesses
is based on a number of factors, including, among others:
' depth and liquidity of markets;
' transaction costs;
' breadth of product offerings and rate and quality of new product development;
' transparency, reliability and anonymity in transaction processing;
' connectivity;
' technological capability and innovation;
' efficient and secure settlement, clearing and support services; and
' reputation.
We believe that we compete favorably with respect to these factors, and that
our deep, liquid markets; breadth of product offerings; rate and quality of
new product development; and efficient, secure settlement, clearing and support
services distinguish us from our competitors. We believe that in order to maintain
our competitive position, we must continue to develop new and innovative products;
enhance our technology infrastructure, including its reliability and functionality;
and maintain liquidity and low transaction costs.
Our business is highly competitive. We expect competition to continue to intensify,
particularly as a result of technological advances and the CFMA and other changes
introduced by the Commodity Futures Trading Commission, or CFTC, that have reduced
the regulatory requirements for the development and entry of products and markets
that are competitive with our own. Additional factors that may intensify competition
in the future include: an increase in the number of for-profit exchanges; the
consolidation of our customer base or intermediary base; an increased acceptance
of electronic trading and electronic order routing by our customer base; and
the ability of other exchanges leveraging their technology investment and electronic
distribution to enter new markets and list the products of other exchanges.
In addition to the competition we face in our derivatives business, we face
a number of competitors in our transaction processing and other business services,
including:
' other exchanges and clearing houses seeking to leverage their infrastructure;
and
' technology firms, including front-end developers, back-office processing
systems firms and match engine developers.
We believe competition in the transaction processing and business services
market is based on, among other things, the cost of the services provided, quality
and reliability of the services, timely delivery of the services, reputation
and value of linking with existing products, markets and distribution.